Japan Economic Foundation

Chairman's Speech

10 . Economic Relations between the United States, Japa

"Economic Relations between the United States, Japan and East Asia"
A Conference at the INSTITUTE FOR INTERNATIONAL ECONOMICS
Washington D.C.
16 March, 2004
Noboru Hatakeyama Chairman and CEO Japan Economic Foundation

Regional Trade Agreements in Asia Pacific Area
The theme of this conference is economic relations between the U.S. Japan and East Asia. East Asia countries normally consist of ASEAN countries, China and Korea. Therefore in this conference we have to address these five economies actually. When we consider bilateral FTAs between five economies, theoretically there can be ten combinations. Out of these ten theoretically possible combinations of bilateral FTAs, three FTAs have been being negotiated, namely between (1)Japan and Korea (2)ASEAN and China and (3)ASEAN and Japan. ASEAN and Korea agreed in October 2003 to discuss the possibility of establishing an FTA between them.
First of all Japan and Korea has started negotiations since December last year with the target of concluding them by the end of 2005. Although most of Korean business people seem to be positive, some in academia express concerns against an FTA with Japan not necessarily because of economic reasons but because of historical reason. Also the difficulty the government of South Korea experienced when it passed a Korea- Chile FTA through Korean diet recently might have made Korean government bearish in terms of concluding FTAs with other countries.
Secondly ASEAN and China started FTA negotiations in November 2001 and agreed on a framework agreement for an FTA in November 2002. Based on this agreement they are supposed to conclude an FTA of trade in goods in coming June this year. According to their plan, tariffs between China and six ASEAN older member countries will be reduced year by year and eliminated in 2010 in principle. With remaining four less developed ASEAN countries---Vietnam, Cambodia, Laos and Myanmar---the dead line will be 2015.
Thirdly ASEAN and Japan agreed on a framework for a CEP(Comprehensive Economic Partnership), including elements of a "possible FTA" between Japan and ASEAN as a whole. According to this framework the two economies consult on rule of origins and others in 2004 and will "make maximum efforts to commence" the negotiation on the CEP from the beginning of 2005. They also agreed that the implementation of measures for Japan-ASEAN CEP should be completed as soon as possible by 2012 for six older ASEAN countries and by 2017 for the newer ASEAN countries. Roughly speaking, this means Japan has been and will be two years behind China although Japan's schedule might be accelerated be cause of the FTA agreement with Mexico.
Japan also has started FTA negotiations respectively with Thailand, Philippine and Malaysia just recently. The second round negotiations are taking place in Tokyo in March and April. These countries are hoping negotiations will be concluded within this year.
Let me touch upon an FTA between ASEAN and Korea and the one between ASEAN and the U.S.
ASEAN and South Korea agreed to "discuss the possibility" of establishing an FTA between them in October 2003 in Bali, Indonesia. This far fetched expression might be reflecting Korean diet's rather negative attitude towards FTAs.
George Bush, President of the U.S., announced "Enterprise for ASEAN Initiative" in November 2002, trying to start FTA negotiations with ASEAN countries. However the U.S. does not negotiate with ASEAN as a whole but has a policy to negotiate one by one. The U.S. signed already an FTA with Singapore in May 2003 and it has become effective since January this year. One of the characteristics of the U.S. FTA policy is that it is politically motivated. For example, the U.S. concluded an FTA with Australia just recently but did not even negotiate with New Zealand that is tightly linked to Australian economy. The U.S. is trying to reward Howard, Prime Minister of Australia, for his cooperative security policy with the U.S. on one hand and to express displeasure to New Zealand for its security policy on the other.

How about the possibility of remaining five FTAs between them? Those would be possible FTAs between (1)China and Korea, (2)the U.S. and Korea (3)the U.S. and China (4)Japan and China and (5)Japan and the U.S. Judging from the current attitude of the government of Korea and its diet, it would be extremely difficult for two possible Korean FTAs with (1)China and with (2)the U.S. to be negotiated soon although these two FTAs would be more plausible than the other three. China might have concerns over the possible predominance of the U.S's agriculture and Japanese manufacture.
The U.S. and Japan are inclined to see how China can comply with its commitment to WTO before they have FTA relations with China. Regarding the possibility of Japan-U.S.FTA, Japan may have a concern on the U.S's agriculture and the U.S. has the same on Japanese manufacture. Therefore I proposed in my presentation here at I.I.E. in March 2002 to have an FTA on service sector alone so that Japan and the U.S. can demonstrate their strong solidarity in the form of economic treaty in addition to the security treaty between us we already have. This service sector alone FTA is admitted in WTO rules, based upon Article 5 of GATS. The 31st of this month, two weeks from now, is 150th anniversary of The U.S.-Japan Treaty of Peace and Amity in 1854. It might be worthwhile to start to explore my proposal from this historical year.
In short there will be two main FTAs coexisting in this area in the near future.. These two will be Japan-ASEAN FTA and China- ASEAN FTA. However there will be only one major FTA respectively in the American continent by the name of FTAA and in European continent by the name of the EU that is going to be including 10 new member countries from this coming May. In this regard there is an opinion that East Asia should also have one major FTA that covers ASEAN 10 countries, Japan, South Korea, China, Hong Kong and Taiwan. Japan Economic Foundation, co-organizer of today's symposium, held an international symposium on Asian FTAs on January 29th and 30th in Bangkok, Thailand, with the co-operation of Thammasat University there. In that symposium a kind of consensus was made to the effect that a road map should be formulated for East Asia Free Trade Agreement, EAFTA, that will cover these 15 economies.
Originally, Kim Dae-Jung, the former President of South Korea proposed establishing an East Asia Vision Group, EAVG, at the second ASEAN plus three Summit Meeting in Hanoi Vietnam in December 1998. Then EAVG came up with a recommendation in November 2001 to establish an EAFTA. In November 2002 Economic Ministers Meeting of ASEAN plus three was assigned to study and formulate options on the gradual formation of EAFTA and report the results of such study to the Summit Meeting in Bali, Indonesia, in October, 2003. However, in the press statement by the chair person of the ASEAN plus three Summit Meeting in Bali, it was only stated that they "explored" some "new" ideas such as to "study" the "feasibility" of EAFTA. This statement clearly suggests retreat from their original position for EAFTA, perhaps reflecting retirement of such key proponents for it as Kim Dae-Jung. That is why our symposium in Bangkok decided to refer to the necessity of establishing the roadmap for EAFTA to put it back on the right track.

10 years ago in 1994 APEC leaders came up with a declaration at Bogor Indonesia to complete the achievement of their goal of free and open trade and investment by 2010 in the case of industrialized economies and by 2020 in the case of developing economies. However if this declaration means the decision for each APEC each economy to implement an unilateral liberalization by the date certain, it would allow for non member economies such as the EU to enjoy "free ride" as was pointed out from the first place by Mr. Fred Bergsten. Is every APEC leader of industrialized economies really ready to make its trade and investment free by 2010 that is only 6 years ahead from now under the banner of "open regionalism" without getting reciprocal concessions from other economies? As a matter of fact the U.S. and Australia signed their FTA just last month. This FTA is one of the first FTA that confessed the goal of Bogor Declaration cannot be achieved. Both the U.S. and Australia are industrialized countries Therefore if they abide by Bogor Declaration commitment seriously, then they are supposed to have achieved their liberalization of trade and investment completely no later than 2010.However this FTA incorporates tariff reduction schedules that go far beyond 2010.For example some U.S .items have 18 years tariff reduction schedules starting from 2005, which means tariffs of these items will not have been eliminated until 2023. I admire their sense of pragmatism and realism. I think time has come we have to study how and when Bogor Declaration to be reviewed so that it can be the real goal of APEC economies.